Getting Hurt by the Loan Drought

Larger companies are facing higher costs, but the pain is far worse for small outfits, which may find their requests shut out

Last Nov. 8 was a red-letter day for Tennessee oil and gas producer Tengasco Inc.: It had secured a $10 million credit line. Although Tengasco had lost money for the past two years, Bank One Corp. was willing to bet on it. The Knoxville-based company was expected to be profitable in 2002. The line could even be upped to $35 million, depending on Tengasco's results.

How things have changed in five months. On Apr. 5, Tengasco Chief Executive M.E. Ratliff got much less pleasant news from the bank. In a letter, Bank One said it was slashing the loan amount to $3.1 million after the value of the company's oil and gas reserves was revised downward. Worse, the bank wanted the $6 million balance back in 30 days. That set off a devastating chain of events, Ratliff says. Tengasco's auditors worried publicly -- in the company's 10-K filing with the Securities & Exchange Commission -- about its ability to survive. Tengasco's stock, already on a slide, tanked nearly 50% in just five days. That's when Ratliff, who says he paid nearly $200,000 in fees to arrange the loan, got mad. "The spirit of our agreement has been totally breached, and it's been devastating to our company," he says. So much so that Ratliff is suing Bank One for $151 million.


  Bank One, which is fighting the suit, won't comment on specific customers. But it has been paring back its loan portfolio for some time. "We still have some companies where the risk profile deteriorates, and we are dealing with them on a case-by-case basis," says John E. Neal, managing director of the corporate bank.

The dreaded money drought is here. After lending record amounts in 2000 and 2001, bankers have drawn the purse strings tight. At the end of April, outstanding commercial and industrial loans were off more than 7% from their February, 2001, peak. Commercial paper -- short-term loans that companies use to smooth cash flow -- is even harder to get. Volume dropped every month between December, 2001, and April, 2002, to $1.35 trillion, 20% below the peak hit in November, 2000.

Bankers have no more tolerance for bad news from borrowers. That's why companies like Tengasco are seeing no mercy. "Bankers are taking out the heavy artillery, sooner," says Henry S. Miller, head of global restructuring at Dresdner Kleinwort Wasserstein.

Small to midsize companies are particularly vulnerable, says Peter "Chip" Vandenberg Jr., a managing director at Trivest Inc., a Miami private equity shop. Just a year ago, big lenders were making cash-flow loans as small as $5 million. Now they won't lend less than $35 million, shutting out smaller companies. In the late 1990s, many banks overrated such borrowers and lost money when the economy turned, Vandenberg says.


  Craig Ehrnst, treasurer at workers' compensation management outfit NCCI Holdings Inc., a privately held company based in Boca Raton, Fla., says it took him three times longer than usual to renew his company's $55 million financing from three banks. Despite a 25-year relationship, he had to lean hard on them to get the money. Renewing a $35 million revolving credit line was even more difficult. Ehrnst says ultimately he told his bankers he would pull all his other business. He finally got one lender to commit -- but to a loan 40% smaller than he wanted.

Larger companies with top credit ratings can always sell bonds -- though interest rates and fees are higher than with loans. In the first quarter of this year, total bond issues were $197 billion, up nearly 70% from a year ago.

Smaller companies and bigger ones that can't tap the bond market are turning to nonbank lenders, like General Electric Capital Corp. Not only do such entities charge higher interest rates, they often impose harsher terms. They may require companies to put up assets as collateral, something many banks don't require if a borrower's cash flow is adequate. And they may subject company finances to more scrutiny.

In fact, the credit crunch has been a bonanza for such financing companies as United Parcel Service Commercial, the lending arm of the shipping giant. Nonpackage-related revenues rose 61% at UPS Inc., to $622 million, in the first quarter of 2002 from the year earlier.


  Most banks say the cutbacks reflect the zeitgeist of the chastened business community post-Enron. But even when economic conditions and the business mood lighten up, companies are likely to find that terms remain harsh. That's because consolidation has eliminated some banks, and many of those that are left have decided commercial lending isn't profitable enough. Explains Chad Leat, co-head of syndicated lending at Citigroup: "There are just fewer banks out there making commercial loans."

That's bad news for executives like NCCI's Ehrnst. No matter how much they kick and scream at their bankers, they're not likely to get what they want. And when they go elsewhere, the bill will be higher.

By Heather Timmons in New York, with Joseph Weber in Chicago